Stop-Loss Order
A stop order placed to exit a position at a loss before it grows larger. The primary tool for managing downside risk.
A stop-loss order is a stop order whose sole purpose is damage control. It sits below a long position (or above a short) and triggers if the trade moves against you past an acceptable threshold.
Once triggered it becomes a market order, so the fill may be worse than the stop price during gaps or high-volatility events. This is known as gap risk.
Placing a stop-loss before entering a trade enforces pre-defined risk — a cornerstone of professional position sizing. Rule of thumb: the stop should be at a logical price level (support, swing low) rather than an arbitrary dollar amount.
On the desk
You buy XYZ at $50.00 with a stop-loss at $48.00. Maximum risk is $2.00 per share. If XYZ falls to $48.00 the position is closed automatically.